Employee Stock Ownership Plans ("ESOP")

Employee Stock Option Plans ("ESOP") were created in the 1970s by Congress as a vehicle to motivate employees by giving them company ownership. Employee empowerment would, in theory, increase the overall efficiency of the US workforce. ESOPs are commonly structured as legal trusts, separate from the company. The trust, not the company, borrows money at a favorable rate to repurchase owners’ shares. Employees may then buy shares in the trust. Since the ESOP does not have any source of revenue, the company makes contributions to the trust to repay the loan.

To provide an incentive to company owners to create an ESOP, Congress included significant tax and estate planning benefits in the ESOP structure. Some of these benefits include:

	Business owners are allowed to sell their shares to the ESOP and reinvest the proceeds tax-free;
	Shareholders of the ESOP benefit from tax deferral and savings; and
	The ESOP interest and principal loan repayment contributions made by the company are tax deductible.

Valuations for ESOP purposes are necessary for two reasons. First, the shares initial purchase from the owner must be valued. Second, the shares owned must be re-valued annually to determine the repurchase price in the event of employee retirement, death or departure.

ESOP valuation is a complex matter. The valuation assertions are scrutinized by the IRS, the ESOP trustees and the Department of Labor. An appropriate valuation must be well documented, unbiased and supportable. Adams Capital's professionals have substantial experience valuing ESOPs and supporting our conclusions.

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